Accounting change forces ACS to report $185 million loss

Posted: Sunday, March 09, 2003

ANCHORAGE (AP) -- Alaska Communications Systems posted losses totaling $185 million last year.

Most of the loss was from the non-cash expense of acknowledging the fallen market values of the local phone companies it bought in 1999.

ACS was formed in 1998 by a group of investors, including the former senior management team of Pacific Telecom. In May 1999 they bought Century Telephone Enterprises Alaska properties, covering Juneau, Fairbanks and more than 70 rural communities, as well as Anchorage Telephone Utility, for a total of $695 million, .

That made ACS the largest local phone service provider in Alaska and gave it ownership of the majority of the state's local access lines.

Executives of ACS said the decline in the value of their local telephone businesses has followed a national trend in recent years. But they also blamed it in large part on a regulatory environment they say favors General Communication Inc., their primary local phone service competitor.

''It's really unconstitutional for property to be taken without just compensation by a government body, and we feel that's what's fundamentally happening with the regulatory commission,'' said Kevin Hemenway, ACS' chief financial officer.

As the dominant local phone service provider, ACS is required by law to give competitors access to its telephone wires at rates regulated by a state commission. ACS has long complained that those rates do not even cover its costs and give GCI an unfair pricing advantage. The companies have been fighting the issue before regulators and legislators for years.

For its part, GCI, which has captured some 40 percent of ACS' customers in Anchorage since 1997, has maintained that ACS is trying to stifle competition with higher rates and that its losses are unrelated to the network access rates.

ACS had to record the decline in value of its local telephone operations under a new U.S. accounting rule involving ''goodwill,'' which refers to the amount over book value that businesses pay for brand names, market share and other intangibles when they buy another company.

For ACS, the goodwill writedown was $170 million last year.

Richard Klugman, a stock analyst with Jeffries & Co. in New York, pointed out that many other local telecom companies have made similar write downs amid a broader downturn nationwide. He also said that the write down means very little in terms of the company's overall financial structure.

''I don't look at it as a big deal,'' Klugman said. ''It's all non-cash and doesn't change the (solid) fundamentals of ACS' business.''

Excluding the impact of the accounting change, ACS said its loss for 2002 was $7.5 million. It lost $11.2 million a year earlier.

ACS' 2002 revenue was $344 million, up 3.4 percent from 2001. Most of ACS' revenue, $227 million, came from its local phone business. That's up slightly from $221 million the prior year.

At the same time, local phone service operating profit, which excludes interest and other expenses, fell to $32 million from $34.8 million, ACS reported.

Separately, ACS announced plans to spin off part of its directory business in an initial public offering on the Toronto Stock Exchange. The company said it would use the proceeds to pay down debt, strengthen its balance sheet and further develop its network.

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